Due to the Catch 22 of umbrella contractor holiday pay, the law is an ass

Quite understandably, there’s been a lot of heated discussion around the subject of umbrella company employees receiving holiday pay in lieu of not taking holidays, writes Chris Bryce, CEO of the Freelancer and Contractor Services Association (FCSA).

A lot of that controversy has been focused on workers not receiving holiday pay when they believed they were entitled to it and umbrella companies apparently keeping that for themselves. In this article, exclusively for ContractorUK, I’m not going to comment on that furore but rather I’m going to try to outline what the complexities are.

Normal workers versus umbrella workers

When you think about it, there is sort of a parallel with ‘normal’ workers in our economy who carry forward unused holiday but then don’t take it – they lose it. In fact, when a ‘holiday pay’ story broke earlier this year, I was on holiday myself – mostly because my partner would have lost the eight days she had carried forward from the previous year!

There are differences between ‘normal’ workers and umbrella workers, of course, and we at the FCSA recognise this. That’s why we tightened our codes last year and will be tightening our codes – again -- in the very near future.

On the surface, it seems really simple – the top-line assignment rate contains an element of money to cover holiday pay, therefore the worker should be entitled to receive that money even if they don’t take the holiday. In principle, I agree that this should be the way it works and the FCSA wants it to be the way it works. But, as ever, it’s not quite as clear cut as it may seem.

Over to a legal eagle

Now, I’m no lawyer (barrack room or otherwise) so, for the purposes of this article, I asked a leading employment lawyer why this issue isn’t easily resolved by the umbrella simply handing over any accrued holiday pay to its employees at the end of the holiday year when the worker hasn’t taken any holiday during the year.

The legal advice surprised me:-

“Under the Working Time Regulations 1998 (WTR), an employee may only be paid in lieu of their holiday entitlement if they have accrued holiday outstanding on termination of their employment. It is not lawful to pay an employee in lieu of their statutory holiday entitlement while their employment is continuing (see regulation 13(9), WTR).

The rationale for this is that the WTR are effectively a piece of health and safety legislation; the purpose of allowing an employee to take paid holiday is to ensure that they have a period of rest and relaxation away from work. If an employee receives a lump sum payment instead of taking their holiday, then they forego that period of rest and relaxation which could be detrimental to their health.

From a strict legal standpoint, paying an employee in lieu of their statutory holiday entitlement while their employment is continuing is therefore unlawful.”

Yes; you read that right!

This guidance on the regulations is worth unpacking. So, a worker can make a conscious decision to not take any annual leave so they can maximise their income during an assignment – (i.e. make hay while the sun shines) -- and that puts their employer, the umbrella company, at risk of acting unlawfully if they then pay the worker in lieu?!

That, in law, appears to be the case. Mr Bumble -- who famously remarked ‘the law is an ass’ -- had something to say about this type of scenario. And I wholeheartedly share his view.

Introducing the Catch 22…

But actually, unfortunately, it gets worse for umbrella workers. The payment of advanced or ‘rolled-up’ holiday pay is also technically unlawful. The legal eagle explains:

“It should be noted, however, that it is also unlawful to pay an employee in advance of them taking their holiday (i.e. rolled-up holiday pay), which is a practice which is common in the umbrella sector.

“One of the arguments against this practice is that if an employee has received their holiday pay in advance and will not, therefore, receive any pay at the time they actually take their holiday, this could leave them in a financially difficult position during their period of holiday and could disincentivise them from taking it. As set out above, this would be contrary to the spirit of the WTR and the purpose of paid annual leave which is to allow a period of paid rest and relaxation from work.”

So it seems we have a Catch-22. If the worker gets paid advance holiday pay, that’s unlawful. If the worker gets paid in lieu of taking holiday to which they’re entitled, that’s also unlawful. Yet the worker, with good cause, is frustrated and angry if they ‘lose’ holiday pay.

‘A difficult situation for umbrellas to navigate’

Now, many umbrella providers do offer advance holiday pay or payment in lieu and there’s a small risk they could end up at an Employment Tribunal because of it. However the lawyer goes on to say:-

“Under the WTR, a worker can bring a claim in an employment tribunal that their employer has refused to permit them to exercise their right to take statutory annual leave (see regulation 30(1)(a), (3) and (4)). A worker could bring such a claim in circumstances where, for example, their employer has forced them to accept a payment in lieu of holiday rather than taking the holiday itself, but it is difficult to see how such a claim could succeed if a worker has been actively reminded and encouraged to take their leave and has only been paid in lieu of it as a last resort”.

Then adding: “This is a difficult situation for umbrella companies to navigate. They must toe a line between complying with legislation which is, unfortunately, out-of-date and unfit for purpose, and ensuring that their contractors receive all of the pay to which they are entitled at a time when the sector is under intense scrutiny and facing criticism. Paying contractors in lieu of untaken holiday should not be a common occurrence (unless it is a payment in lieu on termination of employment), but if the alternative is that contractors lose their accrued holiday pay, then the FCSA and its members may consider that making a payment in lieu is a technical breach worth making.” 

While not defending any historical bad practice in relation to holiday pay, at least now I have an understanding of how such situations might have arisen.

Where the FCSA is going to step in, and step up

So, you may ask, what is FCSA doing about it?

Well, for one thing we’re lobbying for a change to the WTR which will allow lawful payments. But this is fraught with difficulty as the primary purpose of the WTR is one of well-being, and a change permitting payment in lieu could lead to workers being forced by unscrupulous employers not to take holidays but to simply take extra money instead.

More immediately, we’re revising and strengthening the section of our codes dealing with holiday pay. This strengthening will ensure all workers employed by FCSA members receive a clear explanation of their holiday entitlement and clear, frequent and prominent reminders to take the often much-needed leave they’re entitled to and, if the worker chooses not to take that leave, to ensure the worker receives the full payment to which they’re entitled.

So, there you have it, as unpalatable as it may be, and I personally find it very unpalatable, a law intended to help workers is one of the primary causes of difficulty for both workers and umbrella providers in this area. But we at the FCSA will continue to strive to ensure that workers aren’t disadvantaged by this Catch-22 scenario.

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Written by Chris Bryce

Chris Bryce is Chief Executive of Freelancer and Contractors Services Association (FCSA) – fcsa.org.uk - and was previously CEO of The Association of Independent Professionals and the Self Employed (IPSE). Before that he was a contractor for more than 25 years, and as a result has developed a keen eye for the problems faced by contractors in the post-IR35 era.

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